Slow Economy May Erode Projected Deficit Reduction, Stockman Warns

Budget Director David A. Stockman said Monday that the nation’s sluggish economy could obliterate about half of the savings that Congress is seeking to achieve in austere House and Senate versions of the federal budget.

Senate and House negotiators will meet beginning today in an attempt to reconcile their sharply differing plans for curtailing federal spending. Stockman’s remarks emphasized how their fragile efforts to trim today’s record deficits could be overwhelmed by the harsh reality of economic trends.

“I believe we must do better or the size of this problem . . . will become nearly hopeless in the sense of demoralizing the legislative system,” a pessimistic Stockman told the American Stock Exchange’s annual Washington conference.

Both the Senate and House plans would trim about $56 billion from the nearly $230-billion deficit that would be recorded in fiscal 1986 under current policies. Stockman said the sagging economy, by holding tax collections lower than previously expected, could add back $20 billion, boosting next year’s deficit back to nearly $200 billion.

Forecast for 1988

And for 1988, when the Senate approved $140 billion worth of spending cuts and the House $120 billion, Stockman said the weak economy could inflate the deficit by $70 billion to a total of $170 billion.

Stockman cited a private survey of 50 leading economists whose consensus estimate for economic growth in fiscal 1986, which begins Oct. 1, is about 3% after inflation. That contrasts with the Administration’s forecast of 4% annual growth for the next several years.

The economy grew at an anemic annual rate of 1.3% during the first quarter, far below the forecasts of either the Administration or Congress.

Huge budget deficits “can’t persist much longer if we want to maintain an expanding and healthy economy,” Stockman said. “We begin to see the faltering signs in the economy.”

Sense of Urgency

The budget director’s gloomy comments apparently were designed to give an additional sense of urgency to the congressional budget deliberations. Officially, the Administration still offers a forecast of 4% growth for the indefinite future but, by citing a private forecast, Stockman was able to offer a more alarming view of the deficit outlook.

“Any time you put a different forecast into the budgetary black box, you come up with a different set of projections,” said a Stockman subordinate at the Office of Management and Budget who asked not to be identified. “We don’t endorse those figures.

“The key point is that the big budget deficit is still very sensitive to the economy--the economy must keep growing to get it under control.”

Although the Senate and House have set the same target--$56 billion--for deficit reduction next year, they disagree on how to achieve that result.

The Senate wants to save $6 billion by eliminating next year’s cost-of-living increase for 36 million Social Security recipients, while the House would retain the annual raise. The Senate would allow the defense budget to grow along with the rate of inflation, while the House would save $10 billion by holding defense spending at current levels.

Refuse to Compromise

The Democrats, who control the House, will refuse to compromise on Social Security, House Speaker Thomas P. (Tip) O’Neill Jr. (D-Mass.) said Monday.

“We are ready to negotiate our differences in good faith, but we are not ready to go back on our word to Social Security recipients,” he said in a speech to the American Advertising Federation here. The Social Security system is on a “sound financial basis,” and no changes are needed, O’Neill said.

But in the Republican-controlled Senate, Majority Leader Bob Dole (R-Kan.) said that, if House Democrats remain adamant against Social Security changes and still want to achieve $56 billion in spending cuts next year, they must agree to accept “just about every cut” the Senate proposes in other domestic programs.

Dole said that Social Security and defense spending, “standing there like pillars, like two Washington monuments,” are the barriers to a House and Senate budget agreement.